Broker Check

What is your “Loss Cushion”?

March 01, 2016

It might seem like the sky is falling.  The media makes it sound that way.  Many of your family or friends may say so.  Even you may feel like the sky is falling when your investment statement shows a sudden and rapid decline in such a short period of time (”Market Rout Starts 2016 Off on Wrong Foot” – WSJ 1/19/16).  When all the news is bad, it’s natural to become worried and discouraged.  It’s easy to fear the worst and begin to think you’ll never be able to retire, or, if you do retire, you’ll run out of money.   When things are bad, everyone feels the need to do something. But what?

The problem is, most investors don’t have the information needed to decide what to do.  You don’t know when you can retire or how much money you can spend after you retire. That’s because investment statements show only short-term results. They don’t tell you how those results will affect your long-term financial success.

 

Don’t Be Misled Into Making Poor Decisions
Even worse than not knowing what to do, is doing the wrong thing.  Here’s what not to do.

  • Don’t let short-term “value decline” (I did not say “lose money”) and unreasonable fear mislead you into poor investment decisions (reference last month’s commentary “ Goldilocks and the Three Scares” by John Lui)

  • Don’t make decisions that may feel good in the moment (e.g. dumping all your stocks), but hurt you in the long-run (e.g. running out of money).

“The investor’s chief problem and even his worst enemy is likely to be himself.” Benjamin Graham

 

Benjamin Franklin once said: “If you fail to plan, you are planning to fail”.   At Chatham Wealth Management, we believe a sound financial plan is essential to any financial and investment decision.  A financial plan can restore confidence in the future, and guide you to make better financial decisions.   To make smart investment decisions today, you need more than just investment statements.

Creating a Lifestyle Plan starts with understanding your unique short term and long term goals.  Identifying the resources to commit to each goal, such as current investments, savings, essential vs discretionary spending and retirement income creates a “probability of success” to meet those goals.   Afraid of a Bear Market?   For those with a high probability of success, your “loss cushion” will calculate the maximum “decline in value” your portfolio can sustain over the next 12 months while still maintaining the confidence of achieving each goal.    

 

While you certainly can’t ignore today’s challenges, you also don’t want to overreact to them. Your current “wealth” being and your long-term enjoyment until retirement or during retirement are dependent upon your ability to make well-considered financial decisions during good markets and bad.  Updating your plan regularly is the best way to put current events in perspective, decide what changes are appropriate, and strengthen your confidence in the future. 

At Chatham Wealth Management, we provide wealth planning at no additional cost.   If you or someone you know could benefit from preparing a Lifestyle plan, call today to schedule an appointment.  As your most trusted Financial Advisor, we can assure you, the sky really isn’t falling!